Inventory Control and ERP: How to Design your Controls

19th April 2012

The most important point to remember about inventory control is that “control” is synonymous with “transactions”; the more control you seek, the more transactions you do. The reason this is the most important point is because you will likely be managing an organizational paradox in this regard; everyone will simultaneously request more inventory control, and fewer transactions.

On the most fundamental level, inventory quantities are the mathematical result of all of the cumulative additions and subtractions of product from a predefined inventory staging area. How complicated your inventory control system turns out to be is a function of (a) who is responsible for transacting the adds to an inventory location and how, (b) who is responsible for transacting the removals from an inventory location and how, and (c) how many inventory staging locations you define for your factory.

Designing Out Inventory Risk

If you can think through and mitigate a couple of risks around the “who can transact” part of inventory control, you will save yourself an enormous amount of after-the fact corrective actions. The first risk is to recognize that inventory control is one of those dangerous areas where the people who do the work (manufacturing or distribution) do not enjoy the benefit (finance or supply chain). This creates an environment in which it is easy to make inventory control a low priority. The second risk is that most inventory control plans are designed around things going right. Then, when an emergency delivery of a raw material arrives during the middle of the night, no one is around with security authorization to receive it, and manufacturing is left with a lose/lose choice. It is not atypical in that case, for manufacturing to physically move and consume the raw material in production without receiving it, which in turn, cascades to an escalating amount of problems throughout the system.

The other way to simplify your inventory control design within your ERP blueprint is to limit the amount of inventory locations. The best indicator of whether or not you need an inventory location is velocity through the location. Start with a rule of thumb of twenty four hours; if inventory typically remains in a location longer than that, it probably is a legitimate candidate; if most inventory cycles through in less than a day, then you will be creating an unneeded layer of granularity.

Lastly, you will find there are configuration settings that will allow you to automate transactional steps simply by production reporting, and these can be very helpful, if they are well thought out. However, tread carefully; backflushing is not for the faint of heart. Yield variability can quickly turn “inventory control” into “inventory out of control” with backflushing.

Sometimes, it is helpful to imagine a world in which you never had any manufacturing problems, and what the inventory control design would be in that world. The difference between that design and the one you are considering represents your opportunity to solve problems, rather than represent them effectively in ERP.